Ryman Hospitality Properties Inc (RHP) 2011 Q2 法說會逐字稿

Welcome to the Gaylord Entertainment Company's second quarter 2011 earnings conference call. Hosting the call today from Gaylord Entertainment are Mr. Colin Reed, Chairman and Chief Executive Officer; Mr. Dave Kloeppel, President and Chief Operating Officer; Mr. Mark Fioravanti, Executive Vice President and Chief Financial Officer and Mr. Carter Todd, Executive Vice President and General Counsel. This call will be available for digital replay. The number is 855-859-2056 and the conference ID number is 83873252. (Operator Instructions). It is now my pleasure to turn the floor over to Mr. Carter Todd. Sir, you may begin.

Thank you. Good morning, my name is Carter Todd and I am the General Counsel for Gaylord Entertainment Company. Thank you for joining us today on our second quarter 2011 earnings call. You should be aware that this conference call may contain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995 including statements, among others, regarding Gaylord Entertainment's expected future financial performance. For this purpose any statements that are not statements of historical fact may be deemed to be forward-looking statements.

Without limiting the forgoing, words such as believes, anticipates, plans, expects and similar expressions are intended to identify forward-looking statements. You are hereby cautioned that these statements may be affected by the important factors, among others, set forth in Gaylord Entertainment's filings with the Securities and Exchange Commission and in our second quarter 2011 earnings release, and consequently actual operations and results may differ materially from the results discussed or projected in the forward-looking statements. Gaylord Entertainment undertakes no obligation to update publicly any forward-looking statements whether it's the result of new information, future events or otherwise.

I would also like to remind you that in our call today we will discuss certain non-GAAP financial measures and a reconciliation of those non-GAAP financial measures to the most directly comparable GAAP financial measures has been provided as an exhibit to our earnings release and is also available on our website under the Investor Relations section. At this time I would like to turn the call over to our Chairman and Chief Executive Officer, Colin Reed.

Okay. Thank you, Carter. Good morning, everyone, and thanks for joining us to discuss our second quarter results. As usual, I am going to start off by giving an overview of our business and performance for the quarter, and I will also provide some color around how we are thinking about the second half of 2011. Then our President, Dave Kloeppel, will offer some detail around our sales and marketing activities. Mark Fioravanti, our CFO, will conclude our prepared remarks by providing detail on our financial results for the quarter. And then, of course, we will open up the lines for questions.

Overall our business performed solidly this quarter. While the Gaylord National's results were below what we expected, Gaylord Opryland had an outstanding quarter and Gaylord Palms and Gaylord Texan both performed well. As a result we have rebalanced our full year guidance to account for our lower expectations at the National given what is going on in the DC market and also for the spectacular way Opryland has been performing. The net impact is that our consolidated Hotels revenue and profitability remain relatively unchanged.

Now there were a number of bright points this quarter that we will call your attention to, but I do want to start by addressing Gaylord National. Now last quarter we discussed how the environment of uncertainty in Washington around federal budget reductions and the drop in federal per diem rate were impacting the market as a whole, and that we anticipated these pressures to continue through the second quarter. This is exactly what happened, and as Smith Travel Research recently reported, Washington experienced far and away the weakest RevPAR growth in the second quarter among the top 25 markets.

For us, this translated into short term bookings outside of the room spending and rate all being marginally below our expectations. Again, although we had anticipated a soft performance this quarter and factored it into our overall previous guidance, the performance was frankly softer than we, almost anyone, had expected.

Now several analysts have suggested that this market will stay weak for quite some time and while they may very well be right, the circumstances pertaining to the National itself give us cause for a somewhat different view. Now let me try and explain.

Now we normally we don't give this level of color on bookings by quarter at individual properties, but we are going to do it here for the National to show you how we are looking at this hotel. First of all, we have more group room nights on the books for the fourth quarter of 2011 than the number of group guests that traveled in the entire fourth quarter of 2010.

Additionally, our room night production at Gaylord National in the second quarter was strong, as we booked nearly 150,000 group room nights for all future years. In fact, we booked approximately 90,000 rooms in the month of June alone, including about 30,000 room nights for 2012.

Looking at 2012 bookings at the property as a whole, we actually have significantly more net group room nights on the books for next year than we had for 2011 at the same time last year, and we have them on at a better rate. So for us there is not some systemic weakness here pertaining to this hotel, and we believe we are positioned for a better second half as room production is solid and lead volumes are up.

Now putting aside some of the specific market challenges in Washington, overall the second quarter and the first half of the year have performed largely in-line with our expectations for the Hotel business. We knew as we entered 2011 that we would be moving through an inflection point in our group business. Rooms booked during the recession at lower rates would overshadow our group mix for the first half of the year, but as we moved into the third quarter, rooms booked early in the recovery at higher rates would begin to travel.

This is largely how the year played out thus far as evidenced in the second quarter when our business temporarily shifted towards a higher mix of association and SMERF groups; groups that book at lower rates and typically spend less outside of the room while on the property. Many of these lower rated groups were booked during the worst period of the recession when many higher rated corporate groups were unwilling to travel or book for future dates.

Our second quarter mix is typically more heavily weighted towards higher rated corporate groups. In fact, looking back at past second quarters, our mix of corporate groups typically outweigh out mix of association groups by 5 to 10 percentage points.

However, the second quarter of 2011 saw association group outweigh corporate group by 4 percentage points, so the relationship was reversed as we moved through the last remnants of business booked during the worst period of the worst recession since the 1930s. Again, this is the pattern we expected, and signs continue to indicate momentum will build through the second half of the year and rates will improve.

For example, the third quarter of 2011 reflects a mix between corporate, association and SMERF groups that is more in-line with the mix we have seen in the third quarters over the past five years.

Now turning to our top-line results, on an adjusted basis, excluding Opryland, our RevPAR performance was flat compared to the second quarter last year. Total RevPAR was down 3% as a result of the performance at the National and the skew towards association business I have just mentioned. Additionally, attrition and cancellation levels were stable in the second quarter.

In terms of our profitability performance, our CCF margin was down compared to the first quarter of last year, largely driven by the performance of Gaylord National. Conversely Gaylord Opryland was a true standout, delivering its best second quarter of profitability ever and with results exceeding our expectations across nearly every metric.

While it is still difficult to look back at the challenges we were facing this time last year in the wake of the flood and declare there was a silver lining, the operational improvements and upgrades we made during the rebuilding process have clearly paid off, and Dave will touch, I think, on a couple of the statistics on that. While the comparisons to the prior year quarter are not a useful benchmark given the fact that the property was closed in May, it is worth noting that the modifications translated into significant occupancy improvements and a very strong CCF margin of 36%.

Turning to our other properties, Gaylord Texan again performed solidly this quarter with an increase in occupancy and rate helping to drive double-digit RevPAR growth. The property's performance was also bolstered by the immediate success of the new Paradise Springs resort pool, which contributed to a transient room night increase of nearly 40% compared to the second quarter last year. I will let Dave talk more about this, but needless to say, we are very excited by the performance of this attraction and what it means for the transient side of our business.

At Gaylord Palms, rate grew for the first time in a year, an encouraging sign that group pricing pressures in the market are finally beginning to ease. This rate growth and increased occupancy drove positive RevPAR performance, and we are continuing to invest in this property with our room refurbishing project that got underway this quarter, and the addition of a new sports bar and entertainment area in the hotel.

Now we are also looking to replicate the success of the Texan's new resort pool by revamping our existing pool complex at Gaylord Palms. This expanded resort pool offering will be similar to Paradise Springs and will further enhance the property's competitive position in the Orlando market.

Now let's talk about advanced bookings. In the second quarter we booked over 400,000 gross group room nights. Now while this represents a decline compared to the same period a year ago, I want to remind you all of the philosophy we are taking with bookings.

We continue to believe that as the lodging environment improves we will be able to secure long-term gains in group rate, which will be more beneficial to our business than compromising on group rate in the near-term. Although this impacts our bookings in the short-term, we are seeing evidence that our strategy is the right one. Our lead volumes continue to increase and rate on the books is up as well.

Earlier this month we also began selling our DreamWorks Experience offering for the 2011 holiday season, which we expect to have a positive impact on our leisure room nights for the fourth quarter and beyond. I will let Dave speak a little bit more about this and bookings in general.

Moving to growth. As many of you no doubt are aware, this quarter we announced plans to develop a new resort and convention hotel in Aurora, Colorado. It is important to keep in mind that we are in the very early stages of planning and reiterate that we will only move forward with a finalized deal under the appropriate economic conditions and with full confidence that the project makes economic sense for our shareholders.

That said, we are extremely excited about this potential development and our partnership with the City of Aurora for three key reasons. First, the greater Denver region is one we have had our eye on for a while, and all of our research among meeting planners confirms this region has quickly become one of the top ten destinations for business travelers in the US and is only growing in popularity. Our loyal customers who rotate business from property to property have been asking us for some time to add a western option to our brand, and we believe that this is the ideal market to do it in.

Second, the site and proposed resort are a great fit for us and our customers. The resort would be less than ten minutes from the Denver International Airport, one of the most well-traveled and accessible airports in the world, and 25 minutes from downtown Denver itself. Our Aurora site has 85-acres with tremendous views of the Rocky Mountains. And with 1,500 guest rooms and 400,000 square feet of exhibition and meeting space, the project will be similar in scope to our other magnificent properties. Finally, we believe the proposed incentive agreement we have with the City of Aurora and the State of Colorado represents an appropriate deal for our Company and our shareholders.

Now given the enormous economic development this project will bring to the region, the major portion of this package has already been approved by the City of Aurora and the remainder has been submitted for approval to the State of Colorado. The fact that Aurora recognized the economic benefits of using taxes that will be generated by this project alone to help fund it, and the fact that other communities in this region we were discussing with also were eager to offer us a very attractive proposals, signifies that municipalities understand what a Gaylord property represents for their community.

Namely, new jobs, tourism growth, revenue for local businesses, and the potential to anchor additional real estate development around a Gaylord resort, similar to what has happened at the Gaylord National, and to some extent, what has happened at the Gaylord Texan. This is a testament to the strength of our brand and will be key to our growth as we move forward.

As regards the incentives we have secured with the City of Aurora. Simply put, we get the lion's share of our hotel taxes, real estate taxes and sales taxes rebated to us annually for 25 to 30 years, depending on the tax streams.

So let me talk about financing. As you will no doubt have seen from our release this morning, we have redone our bank facility for another four years. Mark will share a little more information with you on this, but simply put, we commence work on this facility straight after the announcement on Denver in late May.

The cost of this facility will be less than the facility we put in place over three years ago with an improved set of covenants which reflects the strong condition of our Company. Our previous facility was for $1 billion, of which, $700 million was fully funded term and $300 million of unfunded revolver.

We initially went to the bank market in late May seeking a $900 million facility, but closed it at $925 million, of which, $400 million is term and $525 million is revolver. We will use approximately $200 million of our new revolver and $100 million of our cash, together with the new term loan, to repay the old term loan. This will give us approximately $325 million of availability in the new revolver. I think Mark will touch on the cost implications for this to the Company.

This together with the operating cash flow our businesses produce, gives us a ton of financial flexibility over the next several years and the capacity to fund construction on our own balance sheet if we so choose. However, as we have noted, we are exploring the opportunities for a capital partner on the Aurora/Denver project. This will enable us to further strengthen returns on the project while maintaining the flexibility in our balance sheet necessary for further geographic expansion of our brand. Now with that I will turn the call over to David.

Thanks, Colin. Good morning, everyone. I am going to start by providing some detail on our sales performance in terms of advanced group bookings. As Colin mentioned, in our second quarter Gaylord Hotels, including Gaylord Opryland, booked over 406,000 gross group room nights for all future years. And as of June 30, we have roughly 4.9 million net room nights on the books for all future years. As of the end of the second quarter of 2011 Gaylord Hotels had 42.3 percentage points of occupancy on the books for 2012. From a total group room nights perspective, we are slightly ahead of where we stood at the same time last year and those room nights that are on the books are on the books at higher rates than they were at this time last year.

As Colin mentioned, we are staying aggressive with our pricing strategy for the out-years, and we feel good about the direction that the group sector is moving, and that by securing shorter term bookings from premium customers who are recovering faster from the recession while delaying booking high demand periods farther out until rate improves, we are positioning ourselves to reap more benefit from the recovery than we have in previous cycles.

Guest satisfaction is a key metric for us, since we know it's the unique experience that we provide that leads guests to our properties return time and time again. That is why I am pleased to be able to tell you that our guest satisfaction scores are still tracking ahead of last year and remain on pace to set a new record for the brand for the year. Notably, Gaylord Opryland continues to lead the brand, as the level of service provided by our STARS, particularly at that property, remains stellar.

Staying focused for a moment on Gaylord Opryland, as Colin mentioned, we are really thrilled with the performance of that property this quarter, and particularly it's impressive CCF margin. The operational improvements we've invested in at the hotel last year after the flood were key to these results.

For example, the new more efficient laundry system is one of the major additions that contributed to our overall energy consumption being down about 20% for the year, so far. This translates to about $1 million in cost savings at the property. Again, this focus is part of our GET Green initiative, which is our sustainability initiative that we announced last quarter, and we continue to track against all sustainability goals we set when we launched that commitment.

Now let me shift the discussion to our transient side of our business. To provide more color on the DreamWorks Experience partnership we announced last quarter, we recently launched the sale of these packages with a Christmas in July event at each of our properties, which resulted in incredible PR and served to generate great excitement in all four of our markets. We also saw this translated into very positive website and call volumes following the events. The programmatic elements are now in place and the experience goes live in November, so we are optimistic about what this represents for our leisure business and our brand in the fourth quarter.

Outside of DreamWorks, as Colin mentioned, over Memorial Day weekend we opened Paradise Springs, our pool complex at the Gaylord Texan. In the roughly two months it's been open it's been a tremendous success and meaningfully lifted the transient room nights performance at that property in the second quarter, as well as significantly increased the call volume to both packages.

We believe there is an even greater opportunity to secure occupancy around our peak group booking periods by improving our leisure offerings. This is why, based on the early successes we have seen with the Gaylord Texan pool, we are looking at a similar investment at our other properties as well. The first example of this will be at the Gaylord Palms, where we will be aiming to replicate the success of the Texan by building a resort pool with many of the same features as Paradise Springs.

We anticipate beginning this project during the third quarter with a target completion date sometime late in the first quarter of 2012. We think that as we continue to balance our great group amenities with more attractive offerings for the leisure customer, our business really stands to benefit. With that, I will pass the call over to Mark to go through the financials.

Thank you, Dave. Good morning, everyone. I am going to spend a few minutes this morning reviewing some the financial highlights for the quarter. I will touch on the balance sheet and our bank facility refinancing that we completed yesterday and then review our guidance for the remainder of the year.

On a consolidated basis, Gaylord Entertainment revenue for the second quarter increased 28.8% to $236.8 million. During the quarter, the Company generated income from continuing operations of $8.6 million, or $0.17 per fully-diluted shares compared to a loss of $26 million, or $0.55 per fully-diluted share for the same period last year. Company-wide consolidated cash flow was $62.8 million for the quarter, a 13.3% increase from the same period last year.

Turning to the Hotel segment, adjusted Gaylord Hotels RevPAR decreased 0.5%, while total RevPAR decreased 3%. Adjusted Gaylord Hotels in-the-year-for-the-year cancellations for the quarter improved slightly, totaling 11,659 room nights compared to 12,432 room nights in the second quarter of 2010.

Attrition rates were flat at 12.4%. Likewise, adjusted Gaylord Hotels attrition and cancellation fee collections were flat at $2.1 million in the quarter. Adjusted Gaylord Hotels CCF decreased to $42.4 million compared to $47.8 million in the prior year quarter.

As Colin mentioned, Opryland performed exceptionally well and delivered it's best ever second quarter in terms of profitability, recording consolidated cash flow of $26.3 million and a CCF margin of 36%. During the quarter, Opryland generated revenue of $73.1 million. RevPAR increased 12%, driven by a 3.9 percentage point increase in occupancy and a 6.3% increase in ADR, while total RevPAR increased 18.7% from the prior year quarter.

Our Opry and Attractions segment had a solid quarter generating $18.6 million in revenue and $5.2 million of CCF.

As it relates to the Corporate and Other segment, consolidated cash flow in the quarter improved $600,000 to a loss of $10.7 million compared to a loss of $11.3 million in the same period last year.

Moving on to the balance sheet, as of June 30, we had long-term debt outstanding, including the current portion, of approximately $1.2 billion and unrestricted cash of $111.4 million. Additionally, $300 million of borrowings remained undrawn under our credit facility and the lending banks had issued $8 million in letters of credit, leaving $292 million of availability under our credit facility.

As Colin mentioned in his remarks, yesterday we successfully refinanced our existing senior secured credit facility that was scheduled to mature in July of 2012. The new credit facility is secured by a pledge of the Company's hotel properties and is guaranteed by certain of this Company's subsidiaries. The new $925 million credit facility will mature in August of 2015, and is comprised of a fully funded $400 million term loan and a $525 million revolving credit line, $200 million of which was drawn at closing. The new credit facility also contains an accordion feature in which the Company can increase availability by $475 million with an agreement of participating banks.

The new credit facility reflects a reduction in term loan and provides us with increased flexibility in terms of revolving credit capacity and financial covenants. Furthermore, we were able to secure favorable financing on the facility with initial pricing set at LIBOR-plus 225 basis points and potentially dropping to LIBOR-plus 200 basis points in 2012. Pricing is determined on a grid pricing structure based on an implied credit facility debt service coverage ratio.

With this refinancing the Company's rated average interest costs declined by 195 basis points, which represents a reduction of interest expense of approximately $27 million annually. We are very pleased by the support that we received from our bank group. Their commitment is a signal of their confidence in our strategy and their recognition of the significant value of our assets.

Finally, turning to our guidance, we are reiterating our 2011 full-year consolidated CCF guidance of $215 million to $230 million. However, we are revising our RevPAR and total RevPAR guidance for adjusted Gaylord Hotels and Gaylord Opryland to reflect our current expectations for both Gaylord National and Gaylord Opryland. As Colin stated, we believe that the out performance of Opryland will offset the challenges faced by the National, and our realignment of full-year guidance has relatively no impact on our overall Gaylord Hotels projected performance in revenue and profitability when compared to our previous guidance.

For adjusted Gaylord Hotels, we have revised our RevPAR guidance downward from an increase of 7.5%to 9.5%, to an increase of 5.5%to 7.5%; and we have revised our total RevPAR guidance downward from 6.5% to 8.5%, to an increase of 4% to 6%.

For Opryland, we have revised our RevPAR guidance upward from an increase of 13% to 15%, to an increase of 17% to 19%; and we have revised total RevPAR guidance upward from an increase of 9% to 11%, to an increase of 15% to 17%.

In terms of full year CCF for adjusted Gaylord Hotels we have revised our guidance downward to $170 million to $177 million, and for Opryland we have revised our guidance upward to $81 million to $85 million. We are reiterating our full-year CCF guidance for Opry and Attractions and Corporate and Other segments. With that, I will turn the call back over to Colin for any closing remarks

Mark, thank you. No. I have no other remarks. We might as well just get to the Q&A. Melissa, we can open the phone lines up, please.

Thank you. (Operator Instructions). Your first question comes from David Katz of Jefferies & Company.

Good morning, all. If we were to just look at this Denver project, I have two questions about it. If we were to try and gauge the remaining risk in this project that it will move forward and reach fruition and compare that with a couple of the others that haven't made it forward, how would we rank those? And then I want to follow up with a financing question about it.

Okay. That is a good question. Let me start on this, and if any of my colleagues want to weigh-in on this that will be fine. So the circumstances here in Aurora are very, very different and the timing is very, very different. We can talk about the two formally aborted deals, the one in Chula Vista and the one in San Antonio, La Cantera. Let me deal with La Cantera.

Early, middle of 2008, it became very clear to us we were on the cusp as a nation and as an economy of something quite potentially frightening. We were seeing things occur in the economy that caused us to pull that deal, and frankly it was absolutely the right decision for this company. None of us, not even you, none of the analysts on this phone had any comprehension of what was before us in 2008. So the circumstances of La Cantera, I think, were very different to where we are today.

As regards Chula Vista, we were very clear when we walked out of that market that we had given that market probably two and a half to three years of our life negotiating with organized labor, negotiating with environmentalists, negotiating with the various agencies in Southern California, and frankly we could see no end to this perpetual hold up and barriers that we were dealing with there. We as a company determined that our efforts were far better channeled in other areas. That is the circumstances of those two.

Now as regards Aurora, as regards Colorado, again, the circumstances of our Company have changed here. We took the lead on the National Harbor development in Washington, and what has happened all around us is that there is an extraordinary building that's taking place, an incredible entertainment area has now grown up.

The three different communities in this neck of the woods in Aurora/Greater Denver region, Front Range, whatever you want to call it, have come to us and negotiated. The amount of money that we are going to get to incent us to come build in this market is very different to what we did in Washington. We have negotiated a package, and the Aurora package is done. We basically get all of that, as I said in the prepared remarks, we get all of the taxes for real estate taxes, we get our hotel taxes, and we get the City's part of the State sales tax.

The piece that isn't done is the application that we have put forward to the RTA to get 2.9% of the sales tax. This is not an environment where we expect to get harassed by agencies and bodies that want to extract their pound of flesh from us. So the issue for us I think is finishing this deal off, and then we can move forward.

I want to remind you that the level of incentives we are getting here is very different to the level of incentives that we got in Washington. We got $145 million of bonds there where the second part, the $50 million, will be paid next year. We are getting very high coupons on that. It was a good deal, but we did that as the industry was peaked. We did that deal back in 2004 and 2005 when this industry was on fire.

We did this deal in Colorado here over the last six to nine months. The amount of money we will be getting here to incent us to build will be dramatically different. I don't think there is a parallel here, David, between what has occurred in the past to where we are today.

Fair to say that the Aurora project sits in a place at this moment that is farther than Chula Vista ever got, or are they virtually in the same place, and we just have a sense that one has a different set of motivations and terms around it?

It is far more vast than we ever got in Chula Vista. We were allowed in this market. If there are companies that are union or companies that are organized, we will allow them to bid in this market, but it is very different to where we were in Chula Vista. We are really moving forward quite quickly with all of the permitting and the setting up the development zones, and we are moving pretty quickly here.

If I can just follow up on the financing quickly. I know that this has been a point of discussion for a number of years, obviously, since going back to before the downturn. But if we are talking about bringing in financial partners prospectively for this Aurora project, would it not make sense for a financial partner to consider looking at one of the more mature hotels, and just from a 30,000-foot level, would it not make more sense for it being an easier investment for someone to walk in and say, "I would like to own a sliver of one of the mature hotel rather than investing in a green field property." Are those discussions being had as well?

The answer to the question is yes, and yes

Okay. We will take that. Thank you very much.

Your next question comes from Bill Crow of Raymond James.

Good morning, guys. I was wondering if you could just dig into DC a little bit and any trends that you have seen more recently. How long you think, and I understand the fourth quarter bookings are next year, given the budget impasse and the problems we have seen there, any trend changes even on the fringe that you can identify at this point that might have more permanent impact on the region?

Bill, this is Colin. I will give you one statistic that we obviously look at every day. It is something that David keeps his finger on the pulse on and I do too, as does Mark. That is the amount of activity we're see from the STAR and target group customer, and we monitor our bucket of leads basically almost daily. And what we have seen here over the course for this hotel, over the course of the last month, two months; is lead volume ticking up.

And that is pretty good, and as I reported in my part of the script, we booked almost 90,000 room nights in June, and our production for July was decent. Our lead volume as of the end of July was very decent.

So we have watched some of these groups, some of these associations that sit on the fringes of government that like to go to Washington. We have seen some of these groups underperform a little bit here. We have seen some of these groups cancel over the last two to three months. Cancel things like a banquet from the middle of the convention, but I think what we are seeing here now is a decent level of activity.

That gives us I think a pretty good level of confidence for the back half of this year and for next year. So, David, do you got any other color that you want to add to that?

The only thing I would add to it, Bill, is if you look at the sales production for the year at the National compared to prior periods; it lagged prior periods January, February March, it started to come up to more consistent with historic periods in April. May was consistent with last year. June was better than last year and July was better than last year.

So we are seeing sequential improvements, and a lot of that was because a lot of the budget discussions, and are we going to freeze this year or not? Once we saw that earlier budget debate start to wane and get into the debt ceiling issue, we did start to see government begin to source again, which is a good sign. We saw more people generally traveling to the DC market than we did in prior periods.

Again, we talked about the bookings that we have on the books for the second half of the year, we feel good about those. They are at elevated levels relative to what we saw last year. We also feel good about the position that we are in for 2012 with the bookings that we have on the books and with the pace that we are starting to see pick up

That's helpful. Thank you. And if I could ask a two-part question about Las Vegas then I will yield the floor. Colin, I know you looked at Vegas hard in the past, you are kind of keen on the market and the opportunities that might exist there. My questions are, one, does Denver take both Vegas and Arizona off the table from an expansion perspective because of the relative location to that? Second, are you finding that Vegas is becoming a tougher competitor? Are you losing any groups because they are willing to discount more than you might be for future years?

Yes. Well, let me touch on Vegas, first of all, because of my background and Mark's background in gaming. We all have a little twinkle in our eye about Vegas, but the problem is we can never find, even in the good times, we could never find a way to get into that market in a responsible way. Simply because there is no way that market will give us forms of incentive to come there.

Now in terms of is Vegas hurting us? When we lose a convention to another market, Vegas shows up quite a bit. But what is interesting is that the good convention hotels in that market still run at 90 points-plus of occupancy. So there is a limit to how much they can steal, but we have such a low relative market share of groups in this country, 2%, 3%, however you want to measure it. If you want to include convention centers across the country share of space, or take them out; our relative share is so very small, so I don't see it as an overall big competitive threat to us.

As regards Denver impacting Vegas and Arizona, I look at Arizona very differently to Vegas in the sense that if we ever do that deal there we will be incentives. And so from us you may have seen some writings that reporting on a conversation, the Mayor of Mesa, he came to see us a week and a half ago. He positioned it when asked in his market that we are still interested in that market, and when that market recovers we will dust it off.

That is fairly accurate, but we as we have told the Mayor of Mesa and the landowner there, there needs to be a hell of a lot of dusting off because this market against our peer set dropped $40 in rate, and it is a long way from recovering. The level of incentives we got into that market is disproportionately different to what we're getting in the Denver market. This is the reason we are prioritizing on Denver.

If miraculously the greater Phoenix market and Mesa recover in the next couple of years, and the economics work for us, then we will resurrect that project. But unfortunately, until that time, it is on the back burner. We like the market, but the market hasn't performed the way it needs to in order for us to be there.

Thank you for your time.

Thank you.

Your next question comes from Jeffrey Donnelly of Wells Fargo.

Good morning, guys. Just want to stay on the development for a moment. I'm sorry, Colin, what did you say was the percentage of the construction costs you expect to receive in Aurora from subsidies?

I didn't. I said that the we haven't put that out. It has been a lot of speculation in the market, but it is anywhere from $200 to $300 million depending upon the way you discount this flow of revenues. But the way to think about it is it's all hotel taxes, real estates taxes, part of our sales taxes, year one for 25 or 30 years depending upon the flow of funds, the part in Aurora we estimate year one will be somewhere in the $15 million to potentially $20 million; and then it's the sales tax piece of it from the state that we have applied for.

What we have agreement on from the city is that they will be prepared to put a moral obligation behind that flow of funds, so we can bond against it if we so choose. The problem with that is that, not the problem, but the opportunity is that, obviously, the city wants to make sure there is a decent sinking fund here and reserves here. So the waterfall, the moneys we would get in years five, six, seven and eight are basically eaten up for the first few years in terms of building reserves on this.

So we are working through how we do this, and that is why we have said we are looking at potential partners here. We have had one interested party come talk to us, and we will see how we structure this. We have got a bunch of time on our side. But the good news is the flow of funds coming in, the taxes we will generate on this project is very sizable, and it is very different to the way we structured Washington.

What unlevered or levered returns are you seeking on your investment and what returns are these prospective partners seeking?

Well, we haven't gotten into that with partners, but with us we will not do a deal unless, and I think you know this, Jeff; we won't do a deal unless it is over the minimum of a 12% unlevered after tax IRR. We won't do a deal on it.

The way that we have structured this deal, for instance the land, the land is being given to us. In Washington we paid a lot of money for it. The deal in Mesa was we would have paid a bunch of money for that. We are getting the land free. And then we have this flow of funds, and we believe the returns to us will be north of the 12% unlevered IRR.

I'm curious, it relates to Mesa. Financially, can you guys undertake two developments at once do you think? Pure, financially?

Look, the issue is whether we do it with a partner, right? Just to put this in perspective, the new financing that we have put in place, the cost of this new facility. If you go back a couple of months ago, three months ago when our previous facility with our LIBOR hedges were in place, the difference between what we were paying on the $700 million term to where we are today with the term and the revolver is about $20 million a year less in financing costs because the hedge is burned off and this particular financing that we have done is at a lower rate.

We are going to be generating a lot of free cash flow in this company. The capital obligations we have in this company, save Denver, are not substantial. We have the typical capital replacement reserve.

We will finish up the Palms room refurbishment, finish that sports bar up, do that pool, and then later next year we will start with the Texas room refurb that will be $25 million, I would think, Dave. But then our hotels are pretty new.

Opryland is completely new, the Palms will be brand-new, and Texas rooms will be done and Washington was opened in 2008. We will throw a lot of free cash flow out of this company. We will look for a partner here that has the same philosophical aspirations that we do, and if the returns on Mesa come to where we think they are, we will figure out how we finance both appropriately. We are not going to over leverage the Company. Our leverage ratios next year look very attractive, and they only get stronger, so we will deal with this in a responsible manner

Two last questions. First, it might seem a bit out there, you are more focused on bringing in the transient guest, it seems, to fill your shoulder periods. Have you ever considered affiliating with a major brand in some way? It strikes me that this is probably the lowest hanging fruit in your portfolio, and maybe finding a way to plug into a reservation system, even on a part-time basis, if such a thing were possible, could help you guys. Is that --

No. That is not a stupid idea, Jeff. That is something we have absolutely looked at here over the last four to five months. We have had some discussions and that is the truth. You have asked a very direct question, and I am giving you a very direct answer. The --

An autograph collection, if you will for --

A little difference to that. I think one of the things, you touched on the opportunity for us to really leverage the growth of this company, is to put another five to eight points of leisure occupancy in these hotels. Dave or Mark, do you want to just talk a little bit about what has been going on here with the resort pool we put in place and it's implications to this third quarter for Texas?

Yes, I will take that. Jeff, you hit on where the strategy from an existing business is taking us, which is we know we are really good at the group business, we are great at packing in premium groups who spend premium amounts of dollars in our best dates, but that leaves a lot of weekend periods, it leaves a couple of midweek periods and certainly leaves holiday periods which are times when the leisure customer travels. That is where DreamWorks comes in and that's where these new investments like the Texan pool that we opened on Memorial Day weekend come in. That investment that we spent $10 or $12 million on in the Texan is producing tremendous results for us.

If you look at what it has done for us this year it has driven up transient room nights in Q2 and Q3 about 50% year-over-year which is a tremendous improvement. It's going to add maybe three points of occupancy to the hotel for the year, which is all incremental occupancy that you otherwise wouldn't get without that sort of attraction.

So when we think about these pools they are more than just flat water pools. This is more a water park, if you will. It's got a couple of fast body slides, it's got zip lines, it's got lazy river, and as we think about doing something similar at the Palms, we are going to make sure that -- and that is in design and construction right now -- we are going to have enough attraction that a family customer who wants to go to Orlando is going to only want to stay at our property because they can go do the theme parks during the day and then come enjoy the great characters of DreamWorks with us in the evenings, and the kids can relax and enjoy a really exciting water experience around our pool. That is a key strategy for us.

And Dave, the other part that is exciting for us here, Jeff, one of the things that we were able to accomplish with these Christmas programs that we put in our hotels is we brought folks in at a real decent rate. And so as we put this pool in place in Texas, we have increased our leisure pricing here through the month of June and July, three or four times here. The third quarter room rate, the incremental room rate that we will generate over the rate that we had last year before we put this pool in place; not only have we generated substantial room nights, I mean I am talking thousands of incremental room nights, that the rate at which we are booking this is $30-plus higher than it was this time last year.

So we are pretty excited about this. We intend to find ways to grow our leisure occupancy in our hotels by incrementally another 5 percentage points here over the next one to two years, which we believe will have a substantial improvement impact on our profitability.

Just one last question. I'll yield the floor. Trying to understand the drag of, I will call it lower rated past bookings on your results and when that burns off. If you don't have it handy, that's fine, but do you know what percentage of the business on your books for the back half of this year and maybe for next year, were booked in that 2008 to 2009 downturn, and maybe what the difference is and the rates on that business versus a say bookings you put on more recently?

I can tell you what we are booking in the year. What we booked this year. The rate difference to what we booked last year. So I will take 2012, so booking for one year out. Booking for 2012 today versus booking for 2011 a year ago. We are booking room nights on a net basis, at a $10 to $12 premium to what we booked last year. That is what our current production looks like. Now the amount of inventory on the books that's from 2009 and 2010, I don't have that handy. We can get back to you on that one

We can follow up off-line. Thanks, guys.

We do see that burning off in this back half of the year though.

Your next question comes from Andrew Didora of Bank of America Merrill Lynch

Hi. Good morning, guys. Colin, I really appreciate the additional color that you gave on National. I just want to dig in on that a little bit more. Just particularly, given your Q4 bookings there. Just curious how much of those bookings is government related and just trying to figure out what the possibility of cancellations out of say government groups in the back half of the year, if the situation in Washington continues to deteriorate here.

I don't have the breakout on those groups. There was a bunch of corporate business in there. It was relatively short term. Andrew we will have to get back to you on that. I don't have the individual bookings in front of me.

Do you have a general sense in terms of how the breakout of the 4Q business has trended over the past few years, whether corporate versus association versus government?

I would tell you this, Andrew, normally we are here in August and the fourth quarter is upon us, and as you know, in the meetings business fourth quarter ends second week of December. Groups that are traveling we are already in discussion with them around what their banquet orders are going to look like, what their pickup is going to look like. For September groups cut off dates are already about to pass for those groups traveling.

We are really not having any discussion that is material with groups that are talking about risk to them traveling. So we feel confident about the fourth quarter groups that are on the books, and we can circle back to you after the call with the breakdown of corporate, association and government.

Now we have seen some government groups that have been sitting on the fence for later this year and early next year that have been in discussions about booking, but none of that is in our forecast and none of that are in our room night production. It seems that some of these government related groups they have been a little bit slow getting to the well.

That is helpful. Lastly on DC, really for next year, obviously one of your bigger competitors were pretty clear they thought the market could see some trouble through next year. You guys did say that your leads were up. I am just wondering how conversion of those leads to definite business have trended this year.

Well, we saw 30,000 room nights booked in the month of June for next year alone. Right now we have materially more room nights in contract form on the books for 2012 for the National than we did for the same time last year. We have over 400,000 room nights on the books in group for National next year which translates into, I think, 55 points of occupancy.

That is helpful. Thank you.

Next question from Steven Kent of Goldman Sachs

Good morning. I just am puzzled a little bit by some of the comments about the change in the pricing of some of the customers who you've booked with because I thought earlier in this downturn you did an excellent job on not booking, or not pre booking low-priced corporate travel or groups, or leisure travel groups, or any of the other groups. Now it seems to be weighing down on your results. I am wondering if this is just purely pricing, or a mixed change? Because it was one of the things that made your results stand out the past few years, but now it seems to be weighing down on your results.

Steve, thanks for the question. We have a little bit of both happening. We have a more aggressive pricing strategy in terms of what the rate card calls for, but we are also in 2011 seeing mix change.

So our current experience, we saw Opryland as an association to corporate mix change. The other three hotels have seen a bigger mix change from corporate to association in 2011. To some extent that is what is driving some of the difference in performance between the two hotels.

When you are looking at what is booking now for the future, most of what is booking now is corporate business which tends to pay a higher rate. A lot of what you seeing in the rate performance that I am describing where I said we are booking rates for 2012 at about $10 to $12 more than we did last year, a significant portion of that is mix shift. Part of it is rate increase, but a significant portion is mix shift.

Let me remind you, Steve, for a second here. Back in 2008 and early 2009 the world was sort of sitting on the edge of a cliff. You guys in your company, which is considered to be the premier investment banking house of the world, also did some things. You made some bets around your equity back then with shareholders that probably in hindsight your company wouldn't have done, but the fact of the matter is in 2008 and 2009, we had no sense as industry how bad this thing was going to get.

So we took some business back in those dark days that in hindsight we probably shouldn't have taken. That is the reality of the circumstances that we were all dealing with then.

Now the good news is our performance as a company through that period, through 2008 and 2009, was substantially better than the industry, and it is because of all of the business we had on the books in 2005, 2006 and 2007 when we were getting a little bit of flack from the analyst that said, "Boy you shouldn't be taking all this business because the higher rated group business, two years from now or a year from now, you can produce more profitability." But the fact of the matter is we out performed industry in this downturn, and we took some business back in 2008 and 2009 that in hindsight we probably shouldn't have taken.

The good news for us that the production in Washington is getting strong, and we booked a lot of business in this second quarter. Our mix will move back to where it has historically been. There is no systematic shift here, it is just that everybody in this industry basically took business back in those dark days because we just didn't know how bad this thing was going to be.

But, Colin, it just seems like it is a mix change rather than a pricing change. That is what I was getting at and it sounds like --

No, no, no. I mean to a certain extent we took business that in the good times we wouldn't have taken. It just so happens it was association, but as this business burns off, we are going to be balancing our portfolio of customers the way we had back in 2008, 2007 and 2006. It is not a philosophical change to do business with low-rated groups. It just isn't. It is just that the circumstances we are dealing with today were a reflection, because our customers tend to book two to three years ahead of time. It is a reflection of those terrible days that we were all dealing with as an economy, back in 2008 and 2009.

Thank you.

Your next question comes from Kevin Milota of JPMorgan.

Good morning, everyone. I had a question on the development/acquisition front. Obviously, you guys are focused on Denver, but in the past you have spoken of the ability to potentially acquire something at the same time that you developed something, so obviously Denver being that property. Are you guys still actively evaluating acquisition opportunities out there, or have your sites purely shifted to developing the new property in Denver?

We look at every hotel -- we know every hotel that we think fits our portfolio, Kevin. We know who owns them, we have a sense, particularly those that have financed with CMBS when all that stuff comes up. We take a look at them.

The problem is there is a lot of money chasing large hotels today. And as we have witnessed here over the last probably six months to a year, multiples have gone pretty aggressive, particularly for decent hotels. We are just trying to -- we are looking at everything that we think fits, but frankly we are only going to do something if we feel that it is going to make economic sense for us, and we are not going to chase stuff.

Okay. On the CapEx front, in terms of DC, obviously, you guys have done a great job with the resort style pools. Have you ever put any thought to DC, or is it just way too seasonal of a market?

We don't think it is way too seasonal. The issue for us is land and how we utilize the land. We have that, probably with our Palms hotel, it is the smallest footprint that we have. It is an issue of land, and how we do it.

We are looking at it and how we can possibly make it work. We think it could really work tremendously well there. The issue is how we do it in an economic way.

Very good. Thank you.

Thank you. Melissa, one more question then we will shut this down.

Your final question comes from Fred Lowrance of Avondale Partners.

Great, guys. Thanks, Colin, for letting me in. I just want to see if you could touch briefly on out-of-room spend. It looks like from the way that your RevPAR guidance is moving around a little bit that maybe Opryland is seeing a little bit better performance than you had originally expected on that front, and then maybe the other hotels, whether it is one in particular or not, is maybe seeing that slow a little bit relative to expectations. But if you could touch on what you are seeing in general, and maybe with specific comment just about your up sale activity from a banquet perspective?

You want to take that Dave?

Fred, Thanks for the question. Your perception is right, particularly on Opryland. They have had a better experience than we had anticipated, and so we are adjusting guidance appropriately.

The other hotels I would say are similar. Your conclusion is correct is what I mean to say. Again, as I pointed out to Steve Kent on his last question, a lot of what we are seeing is mix shift this year, the other hotels from corporate to association, and associations generally don't spend quite as much outside of the room as corporate.

National as we talked about, and I hate to bring up National again and again, but we talked about earlier in the year that we had reach in the first half of the year and some of that wasn't materializing as we expected. That has continued to slow the expectation of booking more corporate business into the National which might drive that outside-of-the-room spend is diminished. And so we are adjusting those expectations from the outside-of-the-room spend perspective, slightly.

In terms of up sale and our effectiveness of being able to drive spend while their on property, we are seeing, particularly corporate groups, when they are on property, they are picking up what we expect them to and then some, in terms of not only group attendance on property, but also the types of events they are having on property. And some of those groups are going way over the top. We had a group here at Opryland last week who had a huge product demo and we ended up building a huge track for them to demo their vehicles on, and that was an over the top experience for that group and it was positive for Opryland as well.

It's really a group by group experience. Some are spending because they know they need to invest for their future and some are a little bit more conservative, but by and large, when you average it all out, it is kind of where our expectations were when we started the year.

Thank you, Dave.

So Melissa, that is the end of the call. If folks have other questions, they know how to get hold of Mark, David or me. I want to thank everyone for their participation this morning, and same time next quarter.

Thank you for participating in today's conference call. You may now disconnect.